China Finds a Friend on the Outside

As China seeks to spread use of the yuan beyond its borders, South Africa has its back.

An increasing number of transactions between the two countries are being settled by directly exchanging rand for yuan. Until about two years ago, almost all trades would have used the U.S. dollar as an intermediary. Now almost 10% of payments are made directly, according to the Society for Worldwide Interbank Financial Telecommunication, or Swift.

China has targeted other countries, including Japan, in its push to bolster the yuan’s role in global trade. So far, though, South African companies have been among the quickest to respond. Banks in the region are making it increasingly easy, and sometimes cheaper, to exchange rand for yuan, also called the renminbi. Because China is South Africa’s largest trading partner after the European Union, that is becoming particularly attractive to the African nation’s corporations.

“As China has relaxed control, we felt that it only made sense to deal directly in renminbi,” said Stephen Baverstock, the director of South African price-tag printer, Traderplus (Pty.) Ltd., which operates a printing plant in Suzhou, in eastern China.

Traderplus in October 2011 started exchanging about $120,000 worth of rand into yuan each month through Absa Group, a Johannesburg-based bank in which Barclays PLC holds a majority stake, Mr. Baverstock said.

Mr. Baverstock’s clients, South African clothing and household goods manufacturers in China, pay him in rand. But Mr. Baverstock needs yuan to pay his Chinese suppliers and employees. He says the direct transactions cut down on conversion fees by eliminating the middle steps of switching rand into dollars and dollars to yuan.

South Africa’s imports from China, mostly manufactured goods, rose to $11.1 billion in 2011, up from $1.1 billion in 2001, according to South Africa’s Department of Trade and Industry. Exports to China, mostly minerals such as iron ore and chromium, have tripled over that period, to $1.1 billion in 2011.

Some attempts to introduce yuan trading in larger markets, like Japan, haven’t gained traction. The dollar and yen are two of the world’s most heavily traded currencies, and it costs less for a Japanese business to exchange yen for dollars, and then dollars for yuan, than to enter the sparsely traded yen-yuan market.

Because exchange volumes between rand and yuan are low, it can still be more expensive to process a rand-to-yuan trade than a rand-to-dollar one, said James Scott, Absa’s head of foreign exchange.

And getting rand-to-yuan trading off the ground will take time, traders say, because not all Chinese suppliers have bank accounts in Hong Kong to handle the transfers.

Still, some banks are responding to demand for simpler foreign-exchange transactions from South African businesses, offering more services as the countries’ bilateral trade continues to grow.

South African traders and importers said Chinese companies also now are offering discounts of up to 7% to firms that conduct rand-yuan transactions, because the Chinese suppliers get tax breaks at home for settling international trade through their own currency.

“With the rebates they’re getting, it helps us to bargain a bit more, and helps both them and us keep costs down,” said Brian Twiss, the director of Wholesale Motor Glass (Pty.) Ltd. Since Oct. 2011, his company has swapped about $145,000 of rand for yuan each month to purchase windshields and other automotive glass from China for sale in its shops in Durban and Johannesburg.

As the yuan has floated more freely, the U.S. dollar and yuan have fluctuated more against other currencies, making a two-step conversion riskier. Since the beginning of September, the rand has fallen 6.3% against the U.S. dollar, according to South Africa’s central bank, and 8.3% against the yuan.

“It’s tough to balance the fluctuations between the three currencies,” said Mr. Christoforakis. Most of Mr. Christoforakis’s suppliers are Chinese, and he is considering swapping 10 million rand ($1.1 million) for yuan every two months.

The amount of global trade payments made in yuan doubled between January and September, to 0.5%, and South Africa was one of a few countries outside Asia to show significant growth, according to Swift.

Direct rand-yuan conversions accounted for 8.7% of payments between South Africa, China and Hong Kong in July, up from 5.2% in January and close to zero in mid-2011. By contrast, about 0.3% of U.S. trade with China involves yuan payments.

Bidvest, a Johannesburg foreign-exchange specialist, was one of the first to make direct rand-to-yuan conversions widely available to corporate clients, in September 2011.

Since then, several global banks have followed. That includes Deutsche Bank, the world’s biggest currency-dealing bank.

Ion de Vleeschauwer, Bidvest’s chief currency dealer, said he now settles 5% of some $20 million in daily trades from rand into yuan directly. He hopes to boost that proportion to half of his South Africa-to-China business in a year.